Index Fund Advisors
Founder & President
Mark Hebner is Founder and President of Index Fund Advisors, Inc. (IFA), author of the popular book, "Index Funds: The 12-Step Recovery Program for Active Investors", and is a respected speaker, news contributor and provider of authoritative information and education on investing.
"Index Funds" has received praise from financial industry and academic luminaries, including John Bogle, David Booth, Burton Malkiel, as well as Nobel Laureates Harry Markowitz and Paul Samuelson. It was nominated as one of the three all-time greatest investment books, along with the writings of John Bogle and Warren Buffett.
IFA avoids the futile, speculative, and unnecessary cost-generating activities of stock, time, manager, and style picking. Contrarily, IFA employs a disciplined, quantitative approach that emphasizes broad diversification and consistent exposure to the structural trends of global publicly-traded markets.
IFA is a true fiduciary financial advisory firm, compelled by law to act in the best interests of clients, always – something the investing public, mistakenly, believes all financial advisors are required to do.
Mark contends that one can be a passive investor but still apply active intelligence to the process of investing. He takes an evidence-based academic approach to this process and illustrates it with art and science.
Mark was a member of the Young Presidents' Organization for 19 years and is currently a member of the World Presidents' Organization and the Chief Executives Organization.
Prior to founding Index Fund Advisors in 1999, Mark was President, CEO and co-Founder of Syncor International (previously a public company - SCOR) from 1975 to 1985. In Jan. 2003, Cardinal Health acquired Syncor for approximately $850 million. As a division of Cardinal Health, it is the largest radiopharmaceutical network in the United States.
BS Nuclear Pharmacy, University of New Mexico
MBA, University of California at Irvine
Assets Under Management:
Nothing contained in this publication is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
This is a great question because essentially what you are asking is “how many managers have enough skill to beat the market after all fees and expenses?” Before we give you an answer it is essential that we are comparing apples to apples. So if we are asking how many managers outperform the S&P 500, which is a US large cap index, then we need to look at the performance of active managers who are trying to pick the winners in the US large cap asset class. We don’t want to look at small cap managers or foreign stock managers or bond managers because we would then be comparing apples to oranges.
All right, enough with the fruit. Based on the Standard & Poor’s Index Versus Active (SPIVA) scorecard as of June 30, 2015, 65.34% of large cap managers underperformed the S&P 500 for the 1-year period. Over the last 5-year period, 80.8% underperformed the S&P 500. Over the last 10-year period, 79.59% of active managers underperformed. These types of figures are very similar in other asset classes like small cap stocks and foreign stocks.
Rest assured, it is very, very difficult to do over long time horizons, which is why we tell our investors to buy and hold a globally diversified portfolio of index funds versus trying to pick the next best winner.
First, risk and return go hand in hand. There is no such thing as a free lunch. For someone who is 26 years old, it is imperative for you take a healthy amount of risk (at least 70% in stocks). The best way to gain exposure to both the stock and bond markets is to hold a globally diversified portfolio of index funds. Forget trying to day-trade, pick winning stocks, time markets, or invest money with hot mutual fund mangers. All of these strategies have led to more destruction of wealth versus a low-cost index alternative. There are times when markets are going to be very turbulent, but you need to stay in it through thick and thin. Time is on your side.
Stay away from buying individual bonds. Transaction costs are too expensive for the amount of money you are looking to invest. Buy a low-cost bond fund instead.
Ideally, you should have 6-12 months of living expenses set aside for a rainy day, with the rest of your assets invested based on your longer term goals. This can include retirement, college planning, purchasing a home, starting a business, etc. Your 401(k) should be heavily invested in equities since you have 35-40 years before you will touch those assets. Shorter term goals should be invested very conservatively using money market funds, short term bond index funds, and maybe a little bit of stock index funds.
Given the very short time horizon, we would recommend staying away from riskier assets such as stocks, real estate, commodities, and long-term bonds. Stick with very high quality short term bonds. Specifically, utilize low cost short-term bond index funds as a safe haven for your assets. The goal is to buy a home. The risk is too great to try and earn a substantial return on your money in such a short time horizon. You are right; it would be pure speculation (gambling) to try to maximize your expected return in the next 2 years. Protect that money. Having a home in the next two years is the priority.
There are two parts to answering your question. First, where should we park your assets? Second, how should we invest those assets?
From a tax standpoint, there is no difference between keeping your 401(k) where it is at and moving it to your new employer. Depending on the overall cost differential between the two plans, I usually suggest that you consolidate your assets in one location just for convenience sake. But if your new employer does not have good investment options or is outrageously expensive, you may be better off rolling your old 401(k) assets into a Rollover IRA. What do I mean by good investment options? You want to see if your new 401(k) plan has low cost index funds as investment options and potentially target-date funds. Low cost and well diversified.
In terms of how we should invest your assets after you have decided to keep it with your old employer, your new employer, or a new Rollover IRA, I suggest a globally diversified portfolio of index funds that matches your capacity to take risk. Because you are in your mid-30s, your capacity to take risk should be high since you cannot touch those assets for a couple of decades. Do not pay attention to the news. Markets have historically rewarded investors who have been able to stick with it over long periods of time. By not taking risk with your retirement assets, you expose yourself to the potential of not having enough assets to support you in retirement. Just to give you some insight, going back to 1928 and just looking at the S&P 500, the lowest 30 year return based on rolling monthly data was 7.80%, which was the 30-year period that coincided with the Great Depression (09/1929 – 08/1959). That was the LOWEST. The median return over the last 89 years has been 11.01%. Time is on your side. You just need to hold on for the ride.
“Alpha” refers to the excess performance of a fund after it has been adjusted for risk or “Beta.” Beta is typically characterized as “market risk.” We would measure the correlation between a particular manager’s fund and the overall stock market. For example, if the fund goes up by 20% when the market goes up by 15%, then we would say that the fund has a Beta of 1.33. Because the fund is more volatile than the overall market, we would expect the fund to outperform the overall market overtime. This might have nothing to do with skill by the fund manager, rather just the particular set of stocks the fund has exposure to. Once we control for Beta, then we can see how much “Alpha” the manager is able to generate above what we would expect to be compensated for in terms of market risk.
It is important to note, there have been advancements in the field of financial economics in terms of Beta. Multiple Betas have been discovered such as market capitalization (size), relative price (value), profitability, and momentum. We must control for all of these factors before we can attribute “alpha” to a particular fund manager.
R-squared measures how much the variability in returns for a particular fund is explained by the benchmark. In other words, it measures how well the benchmark tracks the overall performance of the fund. We would typically want to see something above 0.95, which means that the benchmark tracks the fund over 95% of the time. This is important because we want to make sure we are properly benchmarking a particular fund. If there is a substantial mismatch between the benchmark and the fund, then we may be making false conclusions about metrics such as “alpha.” A practical example would be to compare a manager who focuses on International Growth Stocks to the S&P 500. Two completely different samples and therefore it is not a proper benchmark.